Counted out

The last year was truly an annus horribilis for accountants, and the prospect of losing control of regulation of the profession as a response to the Enron debacle and the subsequent implosion of its auditor Arthur Andersen seems on the cards for 2003.

But that would be no bad thing, according to some of the biggest players in the field. “The word 'self-regulation' is an oxymoron in today's environment, because even if it does work, no one believes you anyhow,” claims Nick Land, chairman of Ernst & Young (E&Y) UK. Last month E&Y, together with fellow 'big four' firm KPMG, came out in favour of scrapping the industry watchdog, the Accountancy Foundation.

The Department of Trade and Industry (DTI) is presently conducting a review of the regulator and its consultation exercise closes this week. In particular, ministers will be looking at its unwieldy structure and the source of its funding. The review was originally scheduled for 2005, but was brought forward as a result of recent horrors.

Land admits that he is “no fan of self-regulation”, and believes that radical reform will help turn the fortunes of his firm, which last year saw its profits per partner figure fall from £449,000 to £378,000. “It's in our own interests, and those of the profession, that the profession is seen to be robust and well-regulated,” he says. “What has happened in the US has knocked everyone's confidence, even though they were US-centric events.”

Land believes that it would be complacent to say that such events could not be repeated in the UK, but argues that the risks are far lower on this side of the Atlantic.

Nevertheless, a sense of gloom pervades the industry. The Association of Chartered Certified Accountants (Acca), for example, last month asserted that claims that “an Enron” could not happen here were “looking increasingly naive”. Accapresident Jonathan Beckerlegge warned: “A number of UK companies, including SFI, Bulmers and MyTravel, have recently had to admit to black holes in their accounts amounting to tens of millions of pounds. This leaves no room for complacency.”

Acca wants to split off “standard setting” from regulation under a new regime. The Accountancy Foundation is the non-statutory independent watchdog; it was set up in 2000 but is not yet fully up and running. It comprises four bodies, headed by the Review Board, which oversees the work of the Auditing Practice Board, the Ethics Standards Board, and the Investigations and Disciplinary Board.

“What we're looking for is a rationalisation of the oversight process so that it's actually more focused and sharper,” explains Acca executive director Andrew Harding. In short, Acca wants to see responsibility for the Auditing Practices Board – the body that sets standards for company audit work – move to the Financial Reporting Council (FRC), the independent body that promotes good financial reporting by companies. “It would make sense for standards to be all in one place, so we have both content and the auditing in one place,” he adds.

The group also want the Accountancy Foundation, the Ethics Standards Board and the Review Board to merge into a single body.

According to Neil Lerner, senior partner at KPMG, the one thing that the events of the last 12 months have revealed is “the need for a more joined-up approach to the development of accounting guidance and the audit implications of these. The current divided structure has been too slow in some areas to react to the crisis in investor confidence. A streamlined body should be capable of reacting more quickly to major industry events in future.”

KPMG is calling for a new, independent umbrella organisation to take over from the current activities of the Accountancy Foundation and the Financial Reporting Council, which would report to the DTI. Under the proposals, the newly-entitled 'Financial Reporting and Audit Authority' would be charged with setting standards for financial reporting, ethics and auditing, encompassing the current roles of the Accountancy Foundation, the FRC and their constituent bodies.

So are the reforms a response to a failure in regulation or a problem of perception in light of the corporate scandals? Land does not believe that regulation in the UK has failed, but that the slow progress of the Accountancy Foundation has been over-taken by events. “Frankly, perception might not be everything,” he adds. “But in today's market, where confidence is so important, perception is to some extent reality.”

Acca takes a more strident line and believes that tougher regulation is needed to police business. The group believes that it is free of vested interests that “can make other bodies appear to be a mouthpiece for the big audit firms”. “There's a need to be doing more than just being seen to be doing something, and it's not simply a 'moving around the deck chairs' exercise,” says Harding. “We do have concerns that the current structure isn't working effectively. It's over-elaborate and lacks a clarity of purpose.”

Lawyers who have represented parties in disciplinary proceedings attest to the inefficiencies of multiple regulators tripping over each other. Roland Ford, a partner at Stephenson Harwood, represented the Joint Disciplinary Scheme (JDS) last November, when E&Y attempted to stop its investigation of its audit of Equitable Life. The Investigations and Disciplinary Board will take over the function of the present JDS, which was operated by the Institute of Chartered Accountants in England and Wales (ICAEW) and the Institute of Chartered Accountants of Scotland (ICAS). Ford calculates that there are roughly a dozen acronyms relating to the regulation of accountancy, which all contribute to the appearance of “a muddle”.

There are other, more fundamental issues at stake. “The overriding concern of any disciplinary process is that it is fair and is seen to be fair,” says Ford. “There are natural justice and human rights implications, as the disciplinary proceedings could deprive someone of their livelihood.”

He points to how slow the profession was in responding to the major scandals of the last decade, such as Maxwell, Polly Peck and Barings. When he advised the JDS last year, E&Y argued unsuccessfully for a stay of the scheme's investigation, on the grounds that the firm had too much to contend with as a result of the £2.6bn lawsuit from Equitable Life policyholders.

The Review Board published its own report into how the profession's six representative bodies handle disciplinary proceedings in December. It made a number of recommendations, calling for the speedier resolution of disciplinary proceedings and for all hearings to be held in public (three of the professional bodies, including ICAEW, at present conduct private hearings).

But the Review Board chair Sir John Bourn (also head of the Government's spending watchdog, the National Audit Office) took the opportunity to argue that it would be wrong to hand responsibility over to the Financial Reporting Council or the Financial Services Authority. “If you were to say this is all so important and problematic and we cannot trust accountants and we're going to take it all away from them, that would encourage irresponsibility,” he claims.

If ministers were to opt for a more independent model of regulation, does that mean funding would have to come from the public purse? Land thinks not. “Independent regulation does not necessarily mean independent funding,” he argues. “The moment the Government funds [the new regime] it becomes accountable. I don't think that's what regulation is about and I suspect that's not what the Government wants.”

Of course, the US's controversial Sarbanes-Oxley Act, which created an accountancy oversight board and increased the maximum prison time for corporate fraud from five to 20 years, will be in the back of the minds of policymakers and industry over here. When the Securities and Exchange Commission voted in favour of establishing a Public Accountability Board last June, the then chair Harvey Pitt stated: “This model sends a loud and clear message that the era of self-regulation of the accounting profession is over.” To what extent it will inform any regulatory regime in the UK remains to be seen.

Patricia Hewitt, Secretary of State for Trade and Industry, has already hit out at the act's tough measures as a classic example of “legislating in haste and repenting at leisure”. “It sets the tone for the world in many ways and in particular for big business,” notes Harding. “If people want to take advantage of the US capital markets, then it's the reality, and people would be foolish to think otherwise.”

“The one thing that we can be sure is going to happen is that the accountancy profession in the US, which has been entirely based upon self-regulation, is going to move into independent regulation through the establishment of a public oversight board,” comments Land. “And without meaning to sound complacent, they're really just trying to catch up with the UK in that respect.”

Accountancy regulation – under review

Trade and Industry Secretary Patricia Hewitt began her review of the Accountancy Foundation back in October last year.
The Accountancy Foundation was due to be reviewed in 2005, but the Enron and Worldcom scandals prompted an early review.
The review is to consider the following areas:
• Whether the professions should continue to set their own ethical standards and to monitor the work and conduct of audit firms, or whether there should be stronger independent oversight or intervention.
• Whether the Accountancy Foundation should focus on the company auditor rather than on the regulation of accountants in general.
• The structure and funding of the Accountancy Foundation.
The consultation period closed on 7 January 2003 and the Government expects to publish its thoughts around the end of the month.


Members of the big four respond

KPMG
KPMG is calling for a new, independent umbrella organisation to take over from the current activities of the Accountancy Foundation and the Financial Reporting Council (FRC). The combined regulatory body would report to the Department of Trade and Industry and focus primarily on financial reporting and the auditing of so-called 'public-interest' organisations, such as listed companies, large private businesses, trade unions or large charities.
According to the firm, “the current divided structure has been too slow in some areas to react to the crisis in investor confidence, and a streamlined body should be capable of reacting more quickly to major industry events in future”.
Under its proposals, the newly-entitled 'Financial Reporting and Audit Authority' would be charged with setting standards for financial reporting, ethics and auditing, encompassing the current roles of the Accountancy Foundation, the FRC and their constituent bodies. It would also oversee disciplinary matters, as well as monitoring activities, including setting terms of reference and commissioning bodies such as the Joint Monitoring Unit to carry out reviews.
KPMG recommends that the new integrated organisation should report to the Secretary of State for Trade and Industry and provide an annual report to be laid before Parliament on its activities, with funding to reflect the principle that the beneficiaries of regulation should pay.

Ernst & Young
E&Y is calling for “independent regulation of the profession [to be] reinforced, with the present structure simplified and the main areas of regulation consolidated under one body, the Financial Reporting Council”.
“We also believe that audit committees should have a more active role in monitoring auditor independence and the relationship between auditors and mana-gement,” the firm argues. “Ultimately, what is required are global standards on corporate governance and the role of auditors, as well as global accounting standards.”